The Effects of Taxation on Heterogeneous Firms: Micro Level Evidence Across Europe
Lead Research Organisation:
University of Nottingham
Department Name: Sch of Economics
Abstract
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People |
ORCID iD |
| Richard Kneller (Principal Investigator) |
Publications
Gemmell N
(2018)
Corporate Taxation and Productivity Catch-Up: Evidence from European Firms
in The Scandinavian Journal of Economics
McGowan D
(2012)
Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries
in SSRN Electronic Journal
| Description | The project has led to two research articles, one of which has been recorded on ESRC Society Today. The second research article is in the final stages of being written and will be recorded soon. The first research paper, entitled 'Tax policy and firm entry and exit dynamics: Evidence from OECD countries' (authors: Richard Kneller and Danny McGowan), studies the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 17 OECD countries from 1998 to 2005. These data have not been previously applied to this question, but provide insight beyond that available elsewhere in the literature because a) they include information on exit alongside entry b) they measure entry and exit across a wide range of enterprise types. The use of exit data allowed us to consider a neglected aspect of the question of the effects of taxation, the response of existing enterprise owners. The use of data that incorporates different enterprise forms is of value as it complements existing evidence on single enterprise forms such as self-employment. Tax changes are thought to cause some substitution between enterprise forms as well as the creation of new firms. Our results suggest that the effects differ according to the type of taxation that is changed (personal verses corporate taxation), the marginal tax rate that is changed and differ across entry and exit. Entry rate are affected by corporate taxation, whereas exit rates are not. This is similar for personal income taxation except the effects differ between negative and positive depending on which marginal income tax rate is altered. These findings are robust to a number of different econometric issues and suggest a causal relationship. The second research article 'Taxation and Technological Catch-up: Evidence from 12 European Countries' (authors: Richard Kneller and Danny McGowan) uses a new micro databse on firm productivity across countries. It builds on a literature that has studied whether policy changes, such as trade liberalisation, spur firms to improve their productivity levels, but considers the alternative question of whether aspects of the policy environment might reduce firms desire to make productivity enhancing investments. The returns to productivity investments are greatest for firms that are furthest behind the technical frontier (the best firms in their industry and country). Taxation impacts negatively on these investments because it reduces their returns, where we expect that these effects are strongest for those firms that are most constrained (either financially or in terms of time and information). We find strong empirical evidence in support of this view. Conditional on any common country-time specific and industry factors, as well as firm fixed effects (to difficult for difficult to measure factors such as managerial ability) we find that higher rates of corporate taxation slow the rate of productivity catch-up form firms, where these effects are larger for small firms (those with less than 20 employees). Again these results are robust to a range of alternative explanations. |
| Exploitation Route | The broad objective of the project was the to aid the development of better approaches to the forecasting and modelling of the effects of different tax structures. The project proposal emphasised differences in the reaction of individuals to the same tax change as a way to provide insight into why similar tax changes do not have symmetric, predictable outcomes at the aggregate level. This required new data on the productivity of UK firms that would be integrated with that for other European countries. The project aimed to improve our understanding of the effect of taxation on aggregate productivity, through its effects on firm productivity growth and rates of (industry) entry and exit. Productivity has been shown to be an important determinant of living standards within a country. For the former, the project was to build on recent developments within the productivity literature that emphasise the contribution of investments in intangible, knowledge based assets as drivers of productivity in both the manufacturing and service sectors. For the latter the objective was to model entry alongside exit using a new data set available from the OECD. The effects on exit rates of firms capture the reaction of existing entrepreneurs to tax changes. The effects on exit had been a neglected aspect within the empirical literature on this topic. |
| Sectors | Government, Democracy and Justice |
| Description | • We have presented and discussed the first outputs of the project with colleagues at the Knowledge, Analysis and Intelligence (KAI) Unit within HMRC/HMT at two separate meetings. • The results were also presented at the International Conference on Taxation Analysis and research. A colleague from KAI acted as the rapporteur on the paper. • An early set of findings were presented to the New Zealand Treasury. • A nontechnical version of the project findings were presented at a 6th form conference hosted by the University of Nottingham, School of Economics. • A summary of the project findings were sent to KAI for comment. • The project was used to fund a research fellow for 9 months, thereby increasing future research capacity within the field. That research fellow has now secured a lecturer position at the University of Wales (Bangor) |
| First Year Of Impact | 2010 |
| Sector | Government, Democracy and Justice |
| Impact Types | Economic |
| Title | Corporate taxation and productivity catch-up |
| Description | UK Firm level productivity data. |
| Type Of Material | Database/Collection of data |
| Year Produced | 2012 |
| Provided To Others? | Yes |
| Impact | I am not aware of any notable impacts |
| Description | Corporate taxation and the productivity and investment performance of heterogeneous firms |
| Form Of Engagement Activity | Participation in an activity, workshop or similar |
| Part Of Official Scheme? | No |
| Primary Audience | |
| Results and Impact | This paper adds to the recent literature use micro-level data to examine the response of firms' productivity levels or growth rates to various policy settings. Our particular interest is to investigate how far corporate tax settings might affect firms' innovation and risk-taking activity. Previous investigations of this issue have examined the link between higher corporate taxes and firm-level total factor productivity (TFP) as mediated through higher profitability. That is, firms with higher corporate profits but in regimes involving higher corporate tax rates are expected to have lower TFP than equivalent firms in low corporate tax regimes. In this paper we re-examine this evidence - which has suggested apparently large and persistent impacts of corporate tax on firm-level TFP, as mediated through profits. We then consider how far alternative indicators of firm-level innovation/technology can provide better proxies for the impact of taxes on productivity via innovation effects than those based on firm profits. |
| Year(s) Of Engagement Activity | |
| Description | Tax policy and entrepreneurship dynamics |
| Form Of Engagement Activity | A talk or presentation |
| Part Of Official Scheme? | No |
| Primary Audience | |
| Results and Impact | It is anticipated that the world's economies will be faced with severe macroeconomic challenges over the next decade. The global financial crisis and the resulting global recession led to the closure of many firms rising unemployment and high levels of public debt in most developed Tax Policy and Entrepreneurship Dynamics closure of many firms, rising unemployment and high levels of public debt in most developed countries. Despite the end of the recession, fears for the future growth of demand remain. The need to reduce public sector deficits, built up partly as an initial response to the crisis, through increases in taxation and reductions in government expenditure have led some to predict that growth will remain low, and unemployment high, for many years to come. Against this macroeconomic backdrop, entrepreneurs and entrepreneurship have been identified as a potentially important factor needed to drive future growth and employment in many countries. Yet, an open question is whether the current fiscal austerity measures might themselves undermine undermine the conditions for entrepreneurship In this work we aim to contribute to this question the conditions for entrepreneurship. In this work we aim to contribute to this question by considering the effect of tax policy on entrepreneurship dynamics for a sample of OECD countries. |
| Year(s) Of Engagement Activity | 2012 |
| Description | Tax policy and firm entry and exit dynamics : evidence from OECD countries |
| Form Of Engagement Activity | Participation in an activity, workshop or similar |
| Part Of Official Scheme? | No |
| Primary Audience | |
| Results and Impact | In this paper we study the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 19 OECD countries from 1998 to 2005. Using a difference-in-differences approach to correct for endogeneity bias we find that increases in corporate taxation affect entry but not exit. The effects of personal taxation depend upon the marginal tax rate that is altered. Increases in marginal tax rates applied at low income levels negatively affect entry and positively affect exit, whereas marginal tax reforms at higher income levels have the opposite effect. |
| Year(s) Of Engagement Activity | |
| Description | Tax policy and firm entry and exit dynamics : evidence from OECD countries |
| Form Of Engagement Activity | Participation in an activity, workshop or similar |
| Part Of Official Scheme? | No |
| Primary Audience | |
| Results and Impact | In this paper we study the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 19 OECD countries from 1998 to 2005. Using a difference-in-differences approach to correct for endogeneity bias we find that increases in corporate taxation affect entry but not exit. The effects of personal taxation depend upon the marginal tax rate that is altered. Increases in marginal tax rates applied at low income levels negatively affect entry and positively affect exit, whereas marginal tax reforms at higher income levels have the opposite effect. |
| Year(s) Of Engagement Activity | |
| Description | Tax policy and firm entry and exit dynamics : evidence from OECD countries |
| Form Of Engagement Activity | Participation in an activity, workshop or similar |
| Part Of Official Scheme? | No |
| Primary Audience | |
| Results and Impact | In this paper we study the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 19 OECD countries from 1998 to 2005. Using a difference-in-differences approach to correct for endogeneity bias we find that increases in corporate taxation affect entry but not exit. The effects of personal taxation depend upon the marginal tax rate that is altered. Increases in marginal tax rates applied at low income levels negatively affect entry and positively affect exit, whereas marginal tax reforms at higher income levels have the opposite effect. |
| Year(s) Of Engagement Activity | |